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The Ratings Game: Paramount stock drops after bearish call by Goldman Sachs

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Goldman Sachs weighed in with a skeptical view of Paramount Global Inc. Tuesday, writing that the current economic backdrop could complicate the media company’s streaming objectives.

“We have not changed our view that [Paramount’s] rich IP [intellectual property] and scaled content production assets could support a sizable streaming business, over time,” wrote Goldman analyst Brett Feldman, in double downgrading the stock to sell from buy. “However, we believe the market is unlikely to underwrite this long-term potential as the near-term operating environment becomes more difficult.”

Feldman worries that macroeconomic pressures could weigh on Paramount’s
PARA,
-4.58%

free-cash flow and earnings before interest, taxes, depreciation, and amortization (Ebitda), at least through next year. This “increases the risk that the company will be able to execute its streaming strategy in a market that is already seeing intensified competition,” he continued, since “ramping” spending on streaming content is critical to subscriber momentum.

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He added that it is “imperative,” in his view, for Paramount to bring its direct-to-consumer spending investments up to the same relative levels as its peers. An $8 billion annual investment in such content by 2023 would get the company to a point where it was spending about 60% to 70% of direct-to-consumer revenue on programming, comparable with others in the market.

“As such, any factors that could prevent PARA from meeting these investment targets could contain its ability to achieve subscriber scale that yields attractive long-term economics,” he continued.

Feldman cut his price target on Paramount’s stock to $20 from $37. Shares of Paramount are off more than 4% in Tuesday afternoon trading.

See also: Disney to raise ESPN+ streaming price to $9.99 in August

Feldman is more upbeat about other companies within the media ecosystem, writing Tuesday that he was reinstating coverage of Warner Bros. Discovery Inc.
WBD,
-1.60%

with a buy rating and $20 target price.

“Our positive investment thesis reflects a view that the merger of Discovery and WarnerMedia positions WBD to achieve material scale as a global streamer while also fortifying its linear networks business and driving significant cost synergies,” he wrote.

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